Independent gauge shows China factory activity softening

Growth in China’s manufacturing sector slowed markedly at the start of the year as the flow of new business slowed despite a boost in export orders, according to a closely-watched gauge.

The Caixin-Markit manufacturing purchasing managers’ index dropped nearly a full percentage point to 51 in January from 51.9 in December, coming in far below a median forecast from economists predicting it would merely inch downward to 51.8.

The gauge remains above the threshold of 50 that separates expansion from contraction and suggests China’s manufacturing sector has now expanded for seven straight months. The sector was in contractionary territory from March 2015 to June last year.

Factory output grew at the slowest pace since September, while total new orders likewise grew at a softer rate. Jobs were shed at a faster pace in December as companies attempted to cut costs. Yet almost a quarter of companies surveyed for the gauge indicated they continued to face sharply rising input costs – particularly metals and oil – that had prompted more than one in 10 companies to raise their prices.

Among the more positive developments in December was a steep uptick in growth of export orders, which came in at the fastest rate since September 2014. Businesses also remained staunchly sunny on their prospects, with expectations for output rising to a six-month high.

The latest reading from Caixin contrasts with the official reading from the National Bureau of Statistics, released earlier this week, which slipped to 51.3 in December from 51.4 in November. However, the Caixin-Markit gauge tracks smaller, private companies in contrast to the official indicator, which focuses primarily on larger, state-owned firms.